On January 26, the U.S. Supreme Court handed down its opinion in M&G Polymers USA v. Tackett , providing guidance on one of the items on our 2015 to-do list a little earlier than expected.

At issue in M&G was a collective bargaining agreement (“CBA”) provision calling for “a full Company contribution towards the cost of [health care] benefits,” with a cross reference to another provision that described health benefits to be provided to employees “for the duration of the agreement.” When the agreement ended, M&G announced that it expected retirees to make contributions toward the cost of their health benefits. The retirees claimed that they had a vested right (guaranteed for life) to free health benefits and filed suit. Initially, the District Court dismissed the suit, but the U.S. Court of Appeals for the Sixth Circuit reversed this decision on the basis of another case called Yard-Man, and sent the case back to the District Court. It then found for the retirees, the Sixth Circuit affirmed, and M&G appealed to the U.S. Supreme Court.

Yard-Man is a case decided by the Sixth Circuit involving retiree insurance benefits where the CBA was ambiguous as to when—or if—the benefits terminated. Relying on three primary rationales, the Sixth Circuit in Yard-Man adopted an inference in favor of the vesting of retiree health benefits.

  1. First, the court looked to the presence of termination clauses in other parts of the agreement and inferred that the lack of one in the health benefits provision must mean the benefits were intended to vest.
  2. Second, it relied on a contract interpretation principle called the “illusory promises doctrine,” and said that if the benefits did not vest, they were an illusory promise for all workers who did not become eligible before the CBA expired.
  3. Finally, they used the “labor negotiations context” to infer that the benefits vested for life because benefits were not mandatory subjects of collective bargaining, are typically understood as a form of delayed compensation, and were keyed to the acquisition of retirement status.

Thus, after Yard-Man, employers had to negotiate very specific language in their agreements in order to avoid a lifetime grant of retiree health insurance coverage.

The Supreme Court did not agree with Yard-Man’s approach. Noting that Yard-Man “places a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements,” the Court said that it distorted the attempt to figure out the intentions of the parties to the contract—the guiding light of contract interpretation.  Yard-Man’s inferences were too speculative to be of use, and the Court said that the Sixth Circuit’s decision here rested these speculative inferences on “a shaky factual foundation” and failed to apply ordinary contract law. Because of this, the Court vacated the decision and sent the case back to the Sixth Circuit for reconsideration, along with instructions “to apply ordinary principles of contract law.”

For labor professionals dealing with collective bargaining issues, this is an important decision. The decision reemphasizes the need for clarity in drafting union contract language. Before this case, if the parties were not clear in the contract, it was almost always a “win” for retirees – they received vested benefits. With the Yardman inference gone, there will be an equal burden on both management and the union to be clear with their contract language. In addition, for employers that currently extend retiree health coverage, but have been considering whether to modify or terminate that coverage for union-represented workforces, the case provides fresh guidance to determine whether the employer may do so.